Samsung’s Lee Tightens Grip on Chaebol in $9.3 Billion Deal

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Cheil Industries' Everland Resort
Visitors walk towards an entrance at the Everland Resort, operated by Cheil Industries Inc., in Yongin, South Korea. Photographer: SeongJoon Cho/Bloomberg

Samsung Group heir apparent Lee Jae Yong solidified his control of South Korea’s biggest conglomerate through the $9.3 billion purchase of a construction subsidiary.

Cheil Industries Inc., the de facto holding company of the chaebol and which counts Lee as the largest shareholder, agreed to acquire Samsung C&T Corp., according to a filing Tuesday. Shares of both companies surged a second day.

Samsung Group is revamping businesses as its leadership transitions to a new generation amid pressure from the South Korean government to simplify the chaebol’s organization. Lee, 46, is exerting more influence throughout the conglomerate a year after his father suffered a heart attack that has kept him from involvement in company operations.

“The merger will help expand Lee Jae Yong and the Lee family’s grip on the overall Samsung Group,” said Park Joong Sun, an analyst at Kiwoom Securities Co. in Seoul. “The merger provides clear messages to the market that it will play a key role in Samsung Group.”

Cheil, with interests spanning construction and a theme park, will offer 0.35 share for each Samsung C&T share, in a deal that valued the target at 10.3 trillion won ($9.3 billion) at Tuesday’s closing prices.

Shares of Cheil Industries rose 6.3 percent as of 9:30 a.m. Wednesday in Seoul while Samsung C&T jumped 8.8 percent. Both stocks surged by the 15 percent daily limit in Seoul on Tuesday. Samsung Electronics Co., the biggest company in the chaebol, fell 1.4 percent.

Cheil IPO

The deal boosts the founding family’s interests in the crown jewel Samsung Electronics.

C&T owns interests in more than a dozen Samsung Group companies, according to data compiled by Bloomberg. That includes a 4.1 percent stake in Samsung Electronics with a market value of about $7.3 billion and 17 percent of Samsung SDS Co., which is valued at more than $3 billion.

The deal makes it more likely that there will be a cash return to investors and could set up an eventual combination of Samsung Electronics with Samsung SDS, analysts at Sanford C. Bernstein, led by Mark Newman, said in a report.

“The main impact from this deal is improved exposure toward Samsung Electronics for the controlling Lee family, and also positions the family well for the next generation control,” the analysts wrote.

Family Stakes

Samsung C&T, South Korea’s biggest builder, was the first Samsung company established in 1938. It has expanded into renewable energy with a wind farm development project in Canada, and it also built the world’s tallest building in Dubai.

The combined entity will use the Samsung C&T name and be South Korea’s fifth-largest company by market capitalization, according to data compiled by Bloomberg. It targets about 60 trillion won in revenue in 2020, compared with 34 trillion won for both companies last year.

The companies will seek approval from shareholders July 17 to merge as of Sept. 1. The offer represents a premium of about 3.7 percent. The merger could be called off if shareholders seek to sell more than 1.5 trillion won in stock of each of the two Samsung units, the filings said.

The younger Lee currently owns 23.2 percent of Cheil. The family holds a majority stake when all their holdings are combined. If the merger proceeds, Lee will be the biggest shareholder with a 16.5 percent stake, Samsung Group said in an e-mail.

Failed Merger

“The new entity could pretty much serve as the holding company for Samsung Group,” said Kang Seung Min, an analyst at NH Investment & Securities Co. in Seoul.

Samsung has accelerated its restructuring since Lee Kun Hee, head of the founding family, was hospitalized in May last year.

Cheil was one of two initial public offerings held last year by the Lee family, which controls the conglomerate of about 70 companies through a web of cross shareholdings.

The conglomerate failed to merge Samsung Heavy Industries Co. and Samsung Engineering Co. in November after shareholders claimed buyback rights that exceeded 1.5 trillion won. Samsung recently completed a stake sale in chemicals and defense businesses to Hanwha Group.

“Samsung Group is simplifying the command structure to strengthen Lee Jae Yong’s grip over the group,” said Chae Yi Bai, an analyst at the Center for Good Corporate Governance in Seoul. “The new structure helps Jay Y. get a more direct hold over the key affiliates like Samsung Electronics.”

The merger will combine the construction businesses at the two units. It will also help Cheil Industries’ catering, resorts and fashion businesses to expand overseas using Samsung C&T’s global network, according to the statement.

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